Seller financing
In a seller-financed sale, you don't get the full price at close. You get a down payment plus monthly payments (with interest) over 5 to 10 years. The property collateralizes the note. You spread your capital-gains tax, earn interest, and often get a higher headline price.
Seller financing, sometimes called owner financing or seller-carry, is a sale structure where the seller plays the role of the bank. Instead of the buyer getting a mortgage from a lender and paying the seller in full at close, the seller carries some or all of the financing themselves.
How it actually works
You sell the property, but instead of receiving the entire price as cash at close, you receive:
- A down payment (typically 15-30% of the price)
- A promissory note from the buyer for the remainder
- Monthly payments at an agreed interest rate over a fixed term (5 to 10 years is common)
- Often a balloon payment at the end of the term, where the buyer either refinances or pays off the remaining balance
The promissory note is recorded against the property as a deed of trust or mortgage. If the buyer defaults, you can foreclose, exactly like a bank can.
Why a seller would want this
Three main reasons:
- Spread the capital-gains tax. Under IRS Section 453 (the installment sale rule), you only pay tax on the principal received each year, not all in year one. For a long-held property with a low basis, this can be the largest financial driver of the structure.
- Earn interest. The cash that would otherwise sit in a brokerage account is instead earning the note rate, secured by a property you know well.
- Higher headline price. In exchange for carrying financing, sellers typically get a stronger price than a cash buyer would offer.
What if there's still a mortgage on the property?
Three structures handle this:
- Subject-to: the existing mortgage stays in place, the buyer takes title subject to it. The seller's name stays on the loan.
- Wrap: the seller carries a new note from the buyer that "wraps" the existing mortgage. Buyer pays seller, seller pays bank.
- Full payoff plus second: the buyer pays off the existing loan at close and the seller carries a smaller second-position note for the balance.
Each has different tax, legal, and risk implications. A real estate attorney should structure the specific note language.
How Kallpa structures seller financing
Kallpa structures seller-financed deals routinely. We typical pay 25-30% down, carry a 5 to 10 year note at a market rate, and balloon at term. We expect personal guarantees, insurance and tax escrows, and annual financial reporting from us. Talk to your real estate attorney before signing anything; we cooperate fully with whatever protections your counsel asks for.
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